Analysts: During Past Panics, Patient Investors Rewarded

By Murray Coleman

It rarely pays to panic when market tremors hit, analysts are pointing out today as fear of economic contagion spreads to Europe and across Asia following Japan’s devastating set of natural disasters.

That might be a tough pill to swallow on a day when the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) is up close to 12%. The exchange-traded note tracks VIX futures, the market’s fear gauge measuring the volatility of U.S. blue chip stocks.

But consider what happened after the 9/11 terrorist attacks on the World Trade Center and the Pentagon, notes MarketWatch’s Mark Hulbert in a look back at past market panics.

He writes:

“Consider an investor who was unlucky enough to have invested in the stock market at the close on Sept. 10, 2001, the day before the attacks. Believe it or not, within just two months that investor would have been in the black.”

Even though it came within the 2000-2002 bear market, industries that were hit hard by the 9-11 attacks bounced back.

Hulbert points to the airline industry, which rebounded within six months, according to closely watched benchmarking results. (Note: the Guggeneheim Airline ETF [FAA] is down 1.7% today.)

Another piece of encouragement comes form a study by Ned Davis Research indentifying the 28 worst political or economic crises over the past six decades prior to 9/11. The average gain six months later by the Dow Jones Industrial Average, which has an easy to access ETF proxy (DIA), was 2.3%.

The market’s behavior after 9/11, Hulbert concludes, was “right in line with historical precedent.”

Analysts at Bespoke Investment Group were also crunching some numbers this morning. They looked at the reaction of the S&P 500 (its ETF proxy is SPY) after one-day declines in the Nikkei of 5% or more.

“Overall, on these days the S&P 500 has typically been weakest at the open, and then gradually made up some of the lost ground throughout the trading day,” the report said.

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As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.